5 Super Simple Steps to Rebuilding Your Credit
This post may contain affiliate links. Please read my disclosure page for more info.
Rebuilding your credit is such an important part of achieving financial stability, yet it can seem like a mystery when it comes properly fixing and maintaining your credit score – mainly because there are so many myths out there.
I won’t lie; credit can be tricky. I know some people who could care less about credit because they feel they’ll never need to use it. That’s fair. Credit is based on a model that mainly promotes borrowing money and getting into debt.
However, your credit score impacts other critical financial situations, like financing a home, so you simply can’t ignore it.
A home is probably the only purchase I’m willing to go into debt over and it’s a long-term decision. If your credit is bad and you try to finance a home, you may get denied or have to pay a pretty high interest rate on that long-term loan.
If you’re willing to finance other purchases like a car or even take out a small emergency loan, you’ll also be faced with ridiculously high interest rates if you have a poor credit score, which will cost you more money.
Interested in travel hacking and earning credit card rewards? You won’t even be eligible for some of the top cards with a poor (600 – 650) or bad (599 and under) score.
On the bright side, you don’t have to hire a credit repair company to “fix your credit.” There are a few simple things you can do on your own to rebuild your credit if you’ve faced bankruptcy before or just have a poor credit score as a result of past mistakes.
1. Start By Monitoring Your Credit Score
I’m sure everyone will be doing this a lot more after hearing about the recent Equifax data breach. It’s unfortunate that the data breach could impact as many as 143 million Americans, but each of us run the risk of becoming a victim of identity theft every day so it’s always wise to check and monitor your credit frequently.
Even if you don’t feel at risk for someone illegally using your credit and ruining your score, you want to keep an eye on your report to make sure all your information is accurate. Look for misspellings of your name, credit inquiries that should have been removed, and incorrect payment history details and call to get them corrected right away.
You can pull your full credit report for free each year by going to AnnualCreditReport.com. You can also track your score for free by using sites like CreditSesame, which allow you to view your FICO score.
If you need to dispute something on your credit report, follow these instructions by the Consumer Financial Protection Bureau.
2. Pay Down Your Existing Debt
Since payment history is a huge factor in determining your score, paying down your debt is one of the best things you can do to rebuild your credit. If you have outstanding credit card balances, overdue loans or bills, or even student loans, it’s best to make consistent payments each month and at least meet the minimum payment requirements.
If you don’t keep up with debt payments, your score will decrease and holding balances could lead to negative remarks on your report that could stay active for years.
If you can’t afford to make your debt payments, contact your creditors and be honest about your situation. They may be able to work with you and negotiate a payment plan. You may also be able to consolidate your debt to a lower, more manageable interest rate through a reputable lender like Lending Club or Avant.
If you’re struggling to pay down credit card debt, you can consider a balance transfer to eliminate interest. Here’s a list of balance transfer cards that can help you save money on payments.
You can also start side hustling to earn more money to put toward your debt and commit to using either the snowball or avalanche method of debt repayment to fix your credit.
3. Consider Keeping Your Oldest Account Open
The age of your credit history is another important factor that helps determine your score. Generally, the longer your history, the better.
The problem with installment loans like car loans and personal loans is that eventually, you have to pay them back in full and doing that will close the account which deletes all your payment history.
If you have a credit card however, you can keep the account open as long as you want, which is highly recommended if possible for your oldest credit card.
If you can’t do this, it’s not the end of the world. I actually closed my first credit card because it was a really bad one and they insisted on charging me a $10 service fee every month. For me, the $120 annual charge wasn’t worth it since I wasn’t using the card at all anymore and it provided no other benefits.
I ended up canceling it but kept my second credit card, which still provides me with a lengthy history.
If you don’t have credit cards but have student loans, paying down your loans at a steady rate can also help you build positive long-term payment history.
4. Pay Bills On Time
This should be a given when considering rebuilding your credit, but you want to make sure you’re paying all your bills even if it’s not a credit card bill. Bills for utilities, your cell phone plan and even medical bills may not help you fix your credit, but ignoring them can hurt your credit if you get reported.
When outstanding bills get sent to collections, some creditors don’t automatically report your balance to the credit bureaus. That means if you respond promptly, you can still negotiate with the collection agency and get on a payment plan.
If your outstanding balance has been reported to the credit bureaus and shows up on your credit report, there’s not much you can do other than pay the bill off and continue to pay all your other bills on time to avoid that situation again.
5. Practice Better Financial Habits and Consider a Secured Credit Card
One of the best ways to rebuild your credit is to start using a credit card, keeping your utilization low and making monthly on-time payments. If you don’t have good enough credit to qualify for an unsecured card, try applying for a secured credit card – here’s a list of ones to consider.
Secured credit cards are great for rebuilding your credit because it’s easy to qualify and most companies report the card to all three main credit bureaus each month.
Your main goal would be to use the card to build some positive payment history. Be sure to keep overall utilization below 30 percent at all times, which means you’re not maxing out your card.
For example, if your starting limit is $500, keep your spending under $150 each month and pay off your balance in full to avoid paying interest. After you do this for a while, your credit card company may increase your limit or offer you an unsecured card as your credit improves.
If you’re not a fan of using credit cards but still want to rebuild your credit, you may want to try to go with a credit builder installment loan from your bank. Again, these types of loans all have an expiration date so you will not be able to keep the account open forever.
Also, be cautious about applying for too many loans or secured credit cards because you don’t want to rack up too many hard inquiries.
Rebuilding your credit takes time and it requires attention to some of the most important factors like payment history, credit utilization and the age of your credit history. Having a revolving line of credit like a credit card can help tremendously but that doesn’t mean you need to spend a ton of money on your card each month.
Even if you just use a card for gas or your monthly Netflix subscription and pay the bill off in full each month, it can help.
Remember that sometimes it’s a waiting game but if you follow a combination of these steps, you’re bound to see your credit score increase after a few months.
What are some other things you’ve done to fix your credit? What myths have you heard about rebuilding your credit? What importance do you put on having a good credit score?